I’m struggling with the idea of selling a rental property that has both a high monthly maintenance fee and a high mortgage rate. The costs to keep this house are currently higher than the monthly income it generates.
I recently refinanced in order to pull out $100,000, so now I owe $420,000 on the property, which is worth approximately $750,000.
My recent refinancing increased my mortgage rate from 5.14% to 7.9%, essentially eating up all my cash flow.
I’m on the fence. Should I sell, or should I refinance for a better rate to free up cash flow?
Losing Money Fast
‘The Big Move’ is a MarketWatch column looking at the ins and outs of real estate, from navigating the search for a new home to applying for a mortgage.
Do you have a question about buying or selling a home? Do you want to know where your next move should be? Email Aarthi Swaminathan at TheBigMove@marketwatch.com.
Dear Losing,
The fact that you’re bleeding money from this rental is not good. You need to either bring down your interest rate or raise rents so you can turn a profit in order to make it a worthwhile investment. But keep in mind that many people are sitting on the sidelines waiting for interest rates to fall, so you might not get your desired price if you decide to sell.
Your mortgage rate is likely the biggest reason your monthly costs have jumped so much. Rates are expected to fall to around 6% or lower by the end of the year. You could refinance then, but do the math to see if it’s worth it.
You’ve already been through the wringer with refinancing, and you likely paid various application, appraisal, attorney and origination fees — in addition to closing costs — to extract that $100,000. All of that is expensive, and now you’re thinking of going through it again.
Even if you refinance again at a lower rate, would that be enough to make a profit? Were you able to turn a profit on that property when rates were at 5%? If not, would you be able to raise rents for your current tenants or perhaps find new tenants who would be able to pay more? And is the house in need of repairs or upgrades?
Unless you can make a profit on the property in the next couple of years, there’s little reason for you to hold onto it, unless you believe that it’s in an area that will experience a significant appreciation in value — you’d want to see appreciation of 20% or more, given the fees you would have to pay upon selling.
Part of your retirement plan
At the same time, a second property is nearly always a good investment. Do you think there will be considerable demand for the rental in the medium to long term? Is it in an area where you might be able to find tenants who would pay enough to cover your costs in the near term so you can at least break even? If so, it’s a good idea to try to hold onto the property, especially if it’s part of your retirement plan.
Provided that you have enough savings to help you get through this current era of 7% rates, and you have the money to refinance down the road to get your monthly costs down to a level where you can have a healthier cash flow, it may be worth keeping the home.
Selling isn’t an easy or simple decision. Because this is not your primary home, you’ll need to factor in the capital-gains taxes you would have to pay, along with 6% in real-estate commissions.
If you do decide to sell at some point in the future, you could roll that money into another like-kind property in order to qualify for a 1031 exemption, in addition to a lower rate.
The bottom line: You need to think like a real-estate investor and leave emotion out of this decision. If the property is not making money or it’s not going to at least break even at some point, you have your answer. But keep in mind that the real-estate market can surprise on the upside and that once you sell the home, you will not be able to take back that decision.
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Bold interior trends, falling borrowing costs and new opportunities for first-time buyers will bring colour and life back into the property market in 2024.
A bleak 2023 saw the market’s pulse all but stop, as would-be buyers put their plans on hold to wait out the turmoil.
House prices tumbled, affordability was stretched to the limit, the number of first-time buyers fell to a ten-year low and mortgage rates reached dizzying heights.
Experts now say the worst is over, with mortgage rates continuing to drop and sellers finally able to take advantage of falling house prices.
As the housing market shifts into a new gear, we highlight the property trends that will dominate 2024 — and what you need to watch out for…
Wait until Spring to buy
The general election — it must be called by December 17 — could stall the property market at the beginning of the year, as prospective buyers await policy pledges.
Robin Thomas, of buying agents Recoco Property Search, says there is ‘always’ a slowdown in the number of property transactions in the run-up to a general election.
‘I have worked in property since 1978 and have been involved in property transactions during the past 11 general elections,’ he says. ‘However, how far in advance of a general election this starts to impact the property market varies considerably.’
And the outcome of the poll will also have a huge effect on the housing market, he says.
There has been talk of a spring election in May after Rishi Sunak announced the Budget would be delivered on March 6 — the earliest date in 13 years apart from in the pandemic. But the Prime Minister may wait until the autumn in the hope the economy improves.
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Nick Leeming, chairman of Jackson-Stops estate agents, says: ‘The possibility of a general election as early as May 2024 could cause buyers to pause and hold off a long-term commitment until they know the impact and the chance of changes to housing policy.’
Estate agent Savills has also predicted a stall in sales at the start of the year, which could delay a recovery in house prices until 2025.
The Conservatives last week announced plans to cut costs for first-time buyers in a bid to win over younger voters ahead of an election. Housing Secretary Michael Gove said the Government would ‘definitely’ have plans in place for prospective homeowners before we head to the polls.
First-time buyers stage comeback
The number of first-time buyers who bought a home with a mortgage fell to a ten-year low in 2023, according to the Yorkshire Building Society.
Would-be buyers have been forced to put their plans on hold — soaring mortgage rates, high inflation and record increases in rent have made it harder than ever to scrape together a large enough deposit, unless they have financial help from loved ones.
Housing affordability has been further stretched for first-time buyers as they are typically subject to stricter stress tests — where lenders work out how much they can afford to borrow based on their finances and possible future interest rate changes — when they attempt to take out a mortgage.
But Lewis Shaw, mortgage expert at Shaw Financial Services, says falling inflation and interest rates could ease the cost of borrowing, opening up buying opportunities that didn’t exist in 2023.
‘First-time buyers have a great chance in 2024 to take a step on to the ladder without the competition they’ve faced from landlords over the past decade.’
This is because dramatic increases in buy-to-let mortgage rates forced many landlords to sell up last year. The Conservatives are expected to promise to cut the upfront cost of a home for first-time buyers as a pre-election giveaway in a last-ditch bid to win over younger voters. This could deliver another boost for renters looking to get their first home.
An end to the London exodus
The number of Londoners leaving the capital to move elsewhere in Britain dropped significantly in 2023 after two years of near-record levels of residents heading out, according to Hamptons estate agents.
The London Borough of Richmond-upon-Thames has been voted the happiest place to live in Britain — the first time it has topped the ‘happy at home’ poll conducted by Rightmove — which asked more than 26,000 people how they feel about where they live.
North London estate agent Jeremy Leaf says the race for space has reversed to some extent as workers now go to the office a couple of days a week. This eases the pressure on families needing to leave London for bigger homes with work spaces.
‘This is likely to continue into 2024. Before and during the pandemic, it was one or the other; now, it is still important for property buyers to work from home but perhaps not as much as immediately post-pandemic,’ he says.
Embrace bold colours… maybe
Vibrant shades will be ‘all the rage’ for homeowners in 2024. Drawing inspiration from the playful ‘Barbiecore’ aesthetic, jovial colours such as bubblegum pink and bright turquoise are set to be key interior design trends this year, according to Decorilla, an interior design service.
It says: ‘These bold and vivacious shades inject an unapologetic sense of fun and energy into interiors, creating spaces that radiate positivity. Monotone furniture and decor are outdated because they lack personality and vibrancy.’
But Michael Burkmar, of Hampshire-based estate agents Burkmars, warns it has ‘always been the case’ that homes with neutral colours are easier to sell.
‘From a marketing perspective, a house with turquoise walls will stand out more but it doesn’t make it any easier to sell. Cream or white walls generally make a place look bigger, while bold colours can be a bit oppressive.’
Marco Helliwell, founder of property advice website myproperty advice.com, has previously said bright exteriors, such as a house with a pink facia, can add up to £20,000 to the value of a property because it typically sparks quick interest from buyers and can lead to a bidding war.
Bungalows are hot buys
Bungalows are surging in popularity among young families — as first-time buyers look for cheaper ways to get on the ladder.
Leah Scarborough, an estate agent at Haart in Essex, says bungalows are being snapped up within weeks and sell far faster than other homes, on average.
‘They are very popular and go so quickly because of the scope they offer. They tend to have bigger gardens and a lot of potential for renovation. Bungalows in need of a little bit of work are being bought by buyers aged 25 to 30,’ she says.
Room sizes in bungalows are usually larger than in new-builds and big plot sizes make them ideal for expansion and growing families. Almost half of bungalows have two bedrooms. But only one in five has more than three, according to the Valuation Office Agency.
Most bungalows are also freehold, meaning buyers own the house and land it’s on outright.
In comparison, most flats are leasehold, meaning buyers do not own the land their property occupies and are at the mercy of the freeholder if there are problems with the building itself.
Wood panelling is back
Panelling has become one of the hottest trends in interior design, shooting up in popularity on social media.
Videos with the hashtag ‘panelling’ have amassed 284 million views worldwide on social media application TikTok.
Wood panelling wallpaper took off in 2023, with Laura Ashley and John Lewis selling fake wood-effect wallpaper.
But carpenter Kai Cassidy, from Maidstone in Kent, says this trend is shifting up a gear into actual wood-effect panelling.
He says it is a great way to brighten a room and is increasingly popular. ‘It’s not just grand old properties asking for these,’ he says. ‘
One of my clients lives in a 1980s house and the panelling looks great in her living room.
‘It takes about four hours to do and costs around £350 with material costs on top.’
Split your home in two
Homeowners could soon be able to convert houses into two flats without planning permission, under new Government plans to slash red tape.
The proposals, announced by Chancellor Jeremy Hunt in his Autumn Statement, could trigger a wave of conversions in 2024.
The new rule, known as a ‘permitted development right’, would apply so long as the external appearance of the building does not change. The Government said it wants to implement the change in 2024 after consulting industry experts.
Ranald Mitchell, of mortgage adviser Charwin Private Clients, says: ‘Many landlords will jump at the chance to use this relaxation in the rules. They are looking at any possibility to improve their yield and are sitting on properties prime for carving up.’
The rule change could also come in handy for multi-generational living, with families dividing up their home so that elderly relatives can move in, Mr Mitchell adds.
You could escape to the chateau…
Dreams of buying a second home in France could soon be back on the table, thanks to a forthcoming change in immigration rules.
Since Brexit, British visitors can spend just 90 in every 180 days in the Schengen Area — almost all the European Union, plus Switzerland, Norway and Iceland.
This derailed many plans to buy a second home in Europe for those who planned to spend much of their retirement abroad.
Currently, the only way second homeowners can stay in France for more than 90 days is to apply for a long-stay visa each year, but acquiring one has been criticised as complicated and expensive.
A rule change approved by the French parliament a fortnight ago has scrapped the limit, extending how long you can spend in France without a visa to six months for British second homeowners.
France’s constitutional council still needs to rubber-stamp the change. However, it would make it far easier for those who buy a home in France to enjoy the property.
Cash will be king
Wealthy buyers who can secure their new home with cash will do so in 2024, even if it means moving into a smaller or less central property because they won’t be at the mercy of mortgage rates, according to estate agent, Jeremy Leaf.
He says: ‘People want to be cash buyers rather than rely on mortgages, even if that means moving further out of town in search of cheaper properties.
‘Many buyers had their fingers burned in 2023, knowing that property values can be reduced if they are relying on a mortgage, and the lender’s surveyor, to assess the value of a potential property.
‘Or they have found that criteria has been too tight to get the mortgage they need. Cash brings better bargaining power and gives buyers the advantage.’
j.beard@dailymail.co.uk
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